Transfer Pricing in India

A glance through Transfer Pricing Penalties

The prices that related parties levy one another for goods and services passing between them is referred to as transfer pricing. In other words, it refers to a price that is paid for goods and services transferred from one unit of an organization to another. In India, the transfer pricing law is codified under the Income Tax Act 1961^[1]. Under law, non-compliance with transfer pricing regulations can result in heavy penalties. This article aims to apprise its readers about various transfer pricing penalties.

Transfer Pricing Penalties

The penalties under transfer pricing can be divided under the following heads:

• Under reporting and misreporting income

Section 270A lays down penalty provisions for under reporting and misreporting of income. Section 270 A (7) provides for a penalty of 50% of the amount of tax payable on the underreported income. Further Section 270A (8) provides that under reported income happens due to the misreporting thereof by any person, then the penalty will be equivalent to 200% of the amount of the tax payable on the underreported income. Also, Section 270A (9)(f) provides that misreporting of income shall mean where there has been a failure to report international transaction or any transaction deemed to be an international transaction or specified domestic transaction, to which provisions of Chap. X applies.

• Failure to maintain documents and information with regards to international transaction or specified domestic transaction

Relevant sections specifies that without prejudice to provisions of Section 270A or Section 271 or Section 271BA, in case where a person in respect of an international transaction or specified domestic transaction-

1. Fails to keep and maintain specific documents and information required under sub-section 1, 2 of Section 92D;
2. Fails to report such transaction which should have been reported;
3. Maintains or furnishes information or document that is incorrect.

In such case, the assessing officer or the commissioner shall direct such person to pay a sum of penalty equal to 2% of the value of each international transaction entered into by such person. Further, Section 271AA(2) provides for penalty of 5 lakh rupees in case of failure to furnish master file within the prescribed date.

Hence regardless of whether the international transaction or specified domestic transaction is determined at arms’ length price, the person who has entered into such transaction must maintain and keep the information or document in respect of such transaction. 

Maintaining or keeping and reporting the information or documents is a key requirement, and any failure in respect of the same may attract a penalty of 2% of the value of every international transaction or specified domestic transaction entered into by such person.

• Failure to furnish report under Section 92E

As per Section 271BA any person who fails to furnish a report from an accountant under Section 92E, may be charged with a penalty. The assessing officer shall have the power to direct such person to pay the penalty amount.

• Failure to furnish information/documents under Section 92D

If a person who has entered into an international or specified domestic transaction doesn’t furnish any information or documents as required by sub-section (3) of Section 92D, then the assessing officer or the commissioner shall direct such person to pay a penalty of a sum equivalent to 2% of the value of international transaction or specified domestic transaction for each such failure. Now this power has also been given to the transfer pricing officer.

• Failure to furnish documents or information under Section 286

Under Section 286, a parent entity or the alternative reporting entity resident in India is required to furnish a report on or before the due date. Section 271GB lays down the penalty for failure to furnish the documents as prescribed under Section 286. There are specific penalty provisions under this which requires payment of penalty where period of failure to furnish the required documents is equal or less than a month, more than a month or in case of continuing default.  

• Incorrect information in reports and certificates

If an accountant or merchant banker or a registered valuer provides information that is incorrect in a report/certificate under any provisions of the act or the rules made thereunder, the AO (Assessing Officer) or the commissioner shall have the power to impose a sum of 10000 rupees as penalty for each such report/certificate. For a quick reference to transfer pricing penalties, you can refer to the table made below-

VIOLATIONS	SECTION	PENALTIES
Under-reporting of Income	270A(7)	50% of the tax payable on the income that has been underreported
Mis-reporting of Income	270A(8)	200% of the tax payable on the misreported income
Not maintaining transfer pricing documents or providing incorrect information or documents	271AA(1)	2% of the value of the transaction
Failure to furnish master file	271AA(2)	5 lakh rupees
Failure to furnish accountant report	271BA	1 lakh rupees
Not furnishing transfer pricing documentation to the transfer pricing officer	271G	2% of the value of the transaction
Failure to furnish CbCr report	271GB	Varies as per the timeline of the violation ranging from 5000 rupees a day to 15000 rupees.

Conclusion

Strict compliance with transfer pricing regulations is a must whether it is in respect of furnishing documents or information or it relates to reporting income. It is necessary for a business to understand the concept of transfer pricing and transfer pricing penalties in order to meet the compliance requirements and to eliminate the risk of non-compliance.

Read our Article:An Overview of Top Concerns on Transfer Pricing